Good morning, ladies and gentlemen, and welcome to the CSX Corporation fourth quarter 2014 earnings call. [Operator instructions.] For opening remarks and introduction, I would like to turn the call over to Mr. David Baggs, vice president of capital markets and investor relations for CSX Corporation. Sir, you may begin.

Thank you, operator, and again, good morning everyone, and welcome again to CSX Corporation’s fourth quarter 2013 earnings presentation. The presentation material that we’ll review this morning, along with our quarterly financial report and our safety and service measurements, are available on our website at csx.com under the Investors section. In addition, following the presentation, a webcast and podcast replay will be available on that same website. Here representing CSX this morning are Michael Ward, the company’s chairman, president, and chief executive officer; Clarence Gooden, chief sales and marketing officer; Fredrik Eliasson, chief financial officer; and calling from another location is Oscar Munoz, chief operating officer. Now, before we begin the formal part of our program, let me remind everyone that the presentation and other statements made by the company contain forward-looking statements. You are encouraged to review the company’s disclosure on the accompanying presentation on slide two. The disclosure identifies forward-looking statements as well as risks and uncertainties that could cause actual performance to differ materially from the results anticipated by these statements. In addition, let me also remind everyone that at the end of the presentation, we will conduct a question-and-answer session with the research analysts. That said, with approximately 30 analysts covering CSX, I would ask, as a courtesy for everyone, to please limit your inquiries to one primary and one follow-up question. And with that, let me turn the presentation over to CSX Corporation’s chairman, president, and chief executive officer, Michael Ward. Michael?

Well, thank you, David, and good morning everyone. Last evening, CSX reported fourth quarter earnings per share of $0.42, down $0.44 in the same period last year, which included $0.06 of favorable real estate gains. Revenue grew 5% in the quarter, where the ongoing headwinds in coal were more than offset by broad-based growth in our merchandise and intermodal markets, reflecting an economy that is expanding. In addition, operations were resilient, even with the volume increase and the challenging winter weather at the end of the quarter as we activated additional resources to keep the network fluid and service levels high. Finally, operating income was $813 million, essentially unchanged from last year, and the operating ratio was 73.2%, up 140 basis points. While we delivered a solid quarter from a top line and operational perspective, you can see that the revenue growth did not flow through to the bottom line as much as we would have liked. That is because there were a number of moving parts on the expense side between 2013 to 2012 that reduced the normal flow-through we would have expected from the $137 million revenue gain. Fredrik will review this in more detail later in the presentation. Turning to our full year results, on the next page, earnings per share were $1.83, up slightly from $1.79 in 2012. Revenue increased $263 million, or 2%, to a record $12 billion. This reflects the underlying strength of our merchandise and intermodal businesses, which more than offset the decline in coal of nearly $300 million. Service levels remain strong, and the team exceeded its efficiency target, delivering $158 million of savings. For the year, we produced operating income of $3.5 billion, which was slightly up from last year, and an operating ratio of 71.1%. As we go through today’s presentation, you’ll continue to see the results of a team that’s managing through challenges and is well-positioned to create sustainable long term value for customers and shareholders. Now I’ll turn the presentation over to Clarence, who will take us through the top line results in more detail. Clarence?

Thank you, Michael, and good morning. As you can see on the left side of the chart, total volume grew 6% and approached 1.7 million loads in the quarter, with mixed performance among the diverse markets we serve. Growth in the merchandise and intermodal markets was partially offset by a decline in coal volume. As a result, merchandise and intermodal now combine for 83% of CSX’s volume. Moving to the right, total revenue increased $137 million to over $3 billion in the quarter, reflecting overall volume growth and price increases across most markets. Looking at the bottom of this panel, merchandise and intermodal now combine for over three quarters of CSX’s overall revenue. Next, revenue per unit remained relatively flat. The impact of core pricing gains and liquidated damages was partially offset by the unfavorable mix impact related to the growth in intermodal versus the decline in coal. Finally, core pricing on a same-store sales basis remained solid across nearly all markets. Recall that same-store sales are defined as shipments with the same customer, commodity, and car type, and the same margin and destination. These shipments represented nearly 80% of CSX’s traffic base for the quarter. On this basis, all-in core pricing was 1.6% in the quarter, consistent with what we saw in the fourth quarter of 2012, reflecting continued rate pressure in the export coal market and more modest increases in domestic coal pricing. Since we continue to have greater variability in both our export and domestic coal business, reflecting global conditions and our fixed variable contract structure, and since our merchandise and intermodal markets are becoming a larger portion of our business, we have again provided you with the same-store sales pricing for these two markets on a combined basis. At the bottom of this panel, you can…

Thank you, Clarence, and good morning everyone. I’m pleased to report that 2013 was a year highlighted by an industry leading safety record, consistent high levels of service for our customers, and continued efficiency gains. As you know, safety is our first and foremost priority. In 2013 CSX continued to evolve its public and employee safety programs, leading the industry in both personal injury and training accident frequency rates. While we are pleased with those accomplishments, we are saddened by the loss of four employees last year, and are committed to avoid such tragedies, and to keep all of our employees and the communities in which we work safe. Let me turn now turn to the company’s operating performance. While overall performance remains strong, some of the measures were down slightly in the fourth quarter, both for CSX and the rest of the industry. This is in part due to more challenging weather conditions at the end of 2013, combined with strong volume levels driven by the record grain harvest, food oil shipments, and peak intermodal loads. Looking at our network measures, velocity held fairly constant and [dwell] improved once again in the fourth quarter. This is evidence of our strong asset utilization and ability to keep the network fluid in the face of difficult operating conditions. Now, before I turn to my resource management discussion, on the next slide, let me just quickly express my gratitude to all the field personnel at CSX for their professionalism, drive, and extra efforts to serve our customers safely and efficiently during these last few challenging weeks. Thank you all. Now, turning to slide 15, carloads were up 6% and gross ton miles were up 6.5% in the quarter, as we saw strong growth in customer shipments. Moving down the chart, you can…

Thank you, Oscar, and good morning everyone. Looking at the top line, revenue increased 5% in the fourth quarter as gains in merchandise and intermodal continue to offset the decline in coal. Expenses increased 7% versus last year, as increased labor, MS&O, and depreciation costs more than offset favorability in fuel and rent. Operating income was $813 million, down $2 million versus the prior year. Looking below the line, interest expense was down $6 million versus last year, driven by modestly lower debt levels and favorable interest rates on debt that was refinanced in 2013. Other income declined $59 million, primarily driven by the cycling of a $57 million pretax gain on the sale of a nonoperating property in the fourth quarter of 2012. Income taxes were $248 million in the quarter, for an effective tax rate of approximately 37%. Overall, net earnings were $426 million, and EPS was $0.42 per share, down from $449 million and $0.44, respectively, from the prior year period. The prior year period has been revised and includes a revenue adjustment which increased EPS of $0.01 a share, the details of which are disclosed in the quarterly financial report. As we turn to the next slide, let’s briefly discuss how fuel lag impacted the quarter. On a year over year basis, the effect of the lag in our fuel surcharge program was $2 million favorable. This reflects $7 million of positive in-quarter lag during the fourth quarter of 2013 versus $5 million of positive in-quarter lag for the same period in the prior year. Based on the current forward curve, we would expect the year over year fuel lag impact to be roughly flat in the first quarter. Turning to the next slide, let’s review our expenses. Overall expenses increased 7% in the quarter. I…

Thank you, Fredrik. In 2013 our team once again demonstrated the ability to manage through the volatility of the marketplace by focusing on the things we control the most and delivering value for customers and shareholders. As we look to the year ahead, we see broad-based growth across most of our markets. While the headwinds in coal will persist in 2014, CSX’s merchandise and intermodal markets, which now collectively represent 83% of our volume, are expected to grow at a rate higher than the overall economy. Over the past four years alone, these markets have collectively added $2.7 billion of revenue to our top line and allowed CSX to still produce earnings growth while going through the evolution in the energy markets. Continued growth in these markets, along with greater efficiency and inflation plus pricing that reflects the value of our service, will help us grow profitably long term. Fredrik mentioned earlier that this is another transition year for CSX as we adjust to the new energy environment. But when I look to the future, I see a vibrant business with a diverse portfolio capable of sustaining double digit earnings growth long term. I’m confident we can capitalize on the momentum before us as the economy continues to grow, and as the nation increasingly recognizes the economic and environmental benefits of rail transportation. And now we’ll be glad to take your questions.

[Operator instructions.] And our first question comes from Mr. William Greene of Morgan Stanley.

Clarence, maybe I can start with you, just on some of the volume commentary. Very good volume trends in the fourth quarter. But how do we think about that sustaining? You went through a lot of positives in terms of the buckets that you discussed here. The strength so far this year, though, hasn’t been there. So can you sort of scrape apart the weather from the underlying, and talk a little bit about how you feel the underlying freight environment looks for you? Does it feel like it’s accelerating, or just kind of stable? Because we saw an acceleration in the first quarter.

I would describe it as this: The first two weeks were essentially, from a freight standpoint, a non-event due to the weather impact that occurred as you’re aware. We had severe weather across the north end of our railroad. A lot of freight was backed up. My view is that by the end of the quarter we will have recovered any of that revenue and freight that we would have lost. In fact, just this week, when we report our numbers for the week, you’ll find that our volumes have picked up significantly. So on the first part of your question, I feel very positive as we move into the first part of this year. And looking forward into this year, the economic indicators that I see show a moderately expanding U.S. economy. And so I feel good that we can continue both in our intermodal area and our agricultural area, and in our chemical areas, both traditional chemicals and those that are related to the oil and gas exploration industry. I feel very positive in those regards. So I think we’re going to have a very good 2014.

So given that outlook, how soon is it before you can start to push a little bit harder on the pricing where things are strong? We understand the coal challenges, but when you look at the areas of strength, how long does it take before the market will start to allow you to price higher, so accelerating pricing in those segments?

Our pricing last quarter, as you know, at 2.9 on all commodities or merchandise and intermodal commodities excluding coal, could have been slightly higher, somewhere in the 3.2 area, had the impact of [RCAS] in the fourth quarter not have been negative. So we feel like we’re pricing, except for that coal, near what we would view as what long term inflation is, which is 3% to 4%. Current inflation, last year, as you know, came in very low. And the current projection for inflation by Global Insights - it came out on January 14 - is at 1.5%. So with the pricing that we already have in place, you’ll see our pricing start to firm up here in 2014. Now, where we have longer term contracts, that may take six months, nine months, until they come up for renewal before you’ll see the impact on those.

Your next question comes from Mr. Anthony Gallo with Wells Fargo.

I actually have a crew by rail question. It looks like there might be some regulatory changes coming, largely focused on the tank car itself. And I’m curious if there’s a grace period, so to speak, to retrofit some of these general purpose cars. Do you need to think differently about your pricing, or more specifically your liability exposure, on some of those older cars that may or may not meet the new regulations?

Clearly from a tank car standard perspective, there are many discussions and conversations going about that. As we move forward, clearly we will take all of that into account and working with our regulators and our customers try to ensure that we have the best sort of footstep going forward.

It might be a guess at this point, that the changes will not be material, so there will be some higher cost, but not material enough to really change the trajectory of that business? Is that a fair way to think about it at this point?

It’s hard to say at this point in time. I think those standards are under review under the PHMSA organization, and I think as we get information from them, we’ll get a better sense of that.

You do know, these cars are largely owned by the customers or leasing companies. And at least there’s some speculation out there that there may be some requirements for retrofits. There’s been various discussions of how much those retrofits should be. So again, it will probably be a number of months if that evolves. But our guess is that the required expense, while large, won’t impact our ability to move this [crude] by rail.

Your next question comes from Mr. Ken Hoexter of Merrill Lynch.

Oscar, the on-time arrivals and delayed departures slipped a bit, it looks like, year over year. And just wondering, how, when you think about the $130 million of productivity costs, how that impacts, I guess, the goal of ultimately what Michael was talking about in terms of double digit earnings growth? So is the productivity and operation and performance part of that goal? Or is that outside of that cycle?

No, productivity has always been part of our overall goal. And as we discuss the fourth quarter, you just have to keep in mind that we experienced one of the first true fall peaks in recent memory with the strong growth across all the markets that Clarence discussed. And while we did have some modest impact to, as you mentioned, departures and arrivals when the harsh weather arrived, and we had a couple of derailments in critical spots, all the things that an outdoor [unintelligible] railroading eventually faces, I’m very confident, incredibly confident, we can continue to improve our service and operate safely while we get the productivity. Those initiatives that we have for next year are very much aligned, and the objectives are being worked by the team. So it’s part of the overall goal, and we have great lines of sight to them.

And if I could just get a follow up, Clarence mentioned targeting flat domestic coal. After a 10% dip this quarter, I just wonder, is there something changing or comps or a lost contract or anything else that’s in there that gives the confidence that we’re going to see on the domestic [unintelligible] side move back to flat?

On the first quarter, we think it will actually be up on a year over year basis, because of our own weak comparables. Last year’s first quarter was weak. On the full year basis, we think we’ve seen coal start to bottom out is point number one. Point number two is, if this weather continues the way it is, the utility stockpiles will continue to draw down. Those in the south are not yet at normal levels, but they are continuing to drop. Those that are in the north are at normal levels, and with some business additions and all that we were able to pick up here in the first of the year, that was the whole point that I tried to make with you, that you could expect, particularly because of some moves we have in our northern region, shorter lengths of hauls, which in turn would produce a lower RPU.

And our next question comes from Mr. Brandon Oglenski of Barclays.

Clarence, if I could follow up from Ken’s question there. So you did mention the shorter length of haul impacting RPU, but can you also discuss, in the past you’ve highlighted that you’ve renegotiated a significant portion of your domestic contracts this year. And that, along with I think your commentary around export pricing was you’re going to try to keep freight a little bit lower. So how should we think about how those new contracts, along with the lower export environment, is going to impact overall coal RPU heading forward?

Well, without getting into the details of our contract discussions with our customers, because each one is different, what we’ve done is try to focus on optimizing our bottom line. And I feel pretty good about where we’ve ended up. I did mention to you that we will have, as a result of some of those negotiations, a shorter length of haul in our traffic this year. And you can expect the export rates will remain low until the market itself changes, particularly the thermal market in Europe. So we feel like we’re coming out of here pretty good. About a year ago, we told you that about 25% of our utility contracts were under the fixed variable structure. Some of our customers have not chosen to go to the fixed variable, but now about 35% of our utility business is under the fixed variable.

And Fredrik, on the MS&O line, I realize you’re lacking the real estate sales gains, but it did seem a little bit higher on a sequential basis. Can you talk about some of the drivers of that increase, and how we should be thinking about MS&O in 2014?

Sequentially, from the third quarter, we did see a little bit of impact of higher train accidents in the fourth quarter versus the third quarter. We also clearly saw the impact of volume. And it was also one of those quarters where we saw a fair amount of SG&A expenses all moving in the wrong direction, from bad debt and some other things. So a lot of things went the wrong way. And some impact from weather there as well, I would say. So sequentially it was a tough quarter. As I think about 2014, I would say in the first quarter, you know that overall, MS&O is the hardest one to forecast, but if you start with last year’s performance, which I think was around 510 or so, you add the $50 million of real estate gains that we don’t have here in the first quarter of 2014, add inflation, and look at headcount, which is roughly flat, maybe up 1% or so based on what we’re seeing, and some weather impact, probably a good starting point. I don’t think it’s going to be, at least not at this point, I don’t expect it to be as high as it was here in the fourth quarter. But it’s clearly going to be higher than what you saw last year.

Our next question comes from Mr. Chris Wetherbee of Citi.

Oscar, just on the resource levels, as you turn the page into the first quarter, we’ve still had some weather kind of persist for a while. Should we expect the same types of resource levels to address the volume growth that Clarence is expecting in the first quarter? Just want to get a rough sense of how we’re thinking about the transition from 4Q into the first quarter.

I think the way to think about it, and the way we have thought about it, is we forecast most of this volume increase, and have been preparing for it. Our pipeline of engineers and conductors is well in line. We’ve got roughly a thousand people coming out over here. And our peak period of [TTMs] is weeks 9 through 23. So we’ve been planning for this for some time. So the resources that we’ve raised, primarily locomotives and engineers and conductor work, I think will stay relatively static. We’ve got all the people in place, and we’re waiting and continuing to deliver on this great business that’s coming our way. So no real change.

And then just thinking bigger picture, for the first half of ’14, when you have some real estate issues and some liquidated damages to overcome, do you have the ability, do you think, to grow earnings power, or grow earnings in the first half of the year? Is that something we should be thinking about more sort of back half once you eclipse some of these headwinds you have? I guess I just want to think about that from a bigger picture, when you think about the growth potential in contracts, that double digit small return, once coal stabilizes.

Let me just answer your question as far as earnings for 2014 first. And we laid out our longer term guidance in terms of the fact that we still have visibility into the low end of the guidance. We’re going to need some help from coal. But in 2014 specifically, I would say that we do expect earnings growth in 2014, but it is going to be predominantly in the second half of the year. I would say the first half of the year, because of the headwinds, with real estate gains and also cycling the full effect of the lower prices we have in our export coal business, I would say the best place to think about the first half is probably earnings to be flat to slightly down. But for the full year, we do expect earnings to grow.

Our next question comes from Ms. Allison Landry of Credit Suisse.

Following up on that last question, I wanted to ask about your confidence level for full year domestic coal to be flat. And specifically, if the key embedded assumption is that stockpiles normalize at some point in the year, you know, end of summer or by the close of the year, and really what I’m getting at is the stockpile situation a potential swing factor that could compromise your ability to grow earnings for the full year?

I don’t think so at all. I think those stockpiles will be normalized here and coal will have bottomed out somewhere by the middle of the year. And I expect if anything, there’s more positive to it than downside.

And if you saw any of this, it would be in the export market, right?

That’s right.

So below normal summer, that shouldn’t have any impact, if that was to occur?

Below normal summer? Meaning a cooler summer?

Yes.

It could, but I don’t expect it to.

And then just as a follow up question, on I believe it was slide 12, there’s a comment that says “pricing to remain above rail inflation for the long term.” Is there any inference here that this may not be the case for 2014?

No, there is no inference that that is the case for 2014.

Our next question comes from Mr. Justin Yagerman with Deutsche Bank.

It feels like, to some extent, if I go back several years, we were talking about pricing above inflation, when you guys had legacy and you had the ability to kind of command that kind of pricing in the coal industry. And now we’re talking about pricing above inflation ex coal. And I realize that coal has been lower as a percent of revenue, but in terms of just the absolute statement of we need to price above inflation, do you feel like you’ve lost control of that because of the change in the coal market? And is there a way to get that back in your other markets, whereby you can make that statement independent of coal?

Coal’s going to depend on a multiple series of events. The export side of coal is going to be dealing with what is the demand, both on the thermal side and the metallurgical side, and it’s a globally traded commodity. So as it goes up, we’re going to go up with it in terms of pricing. And as it goes down, we’re going to go down to what we feel is a floor level that we’ll go down to in our pricing on that. And the other markets, I think our record has been that we have consistently priced in the 3% plus area over the last few quarters here, and I see no reason for that not to continue. In fact, if the economy does what some economists have been predicting, just as recently as yesterday, with the release of the Beige Book, saying that in most sectors of the United States the economy was growing modestly, then our pricing power comes back even stronger.

I’d like to add a little bit to that. So if I think about the value creation we did over let’s call it the 2004 to 2012 period, as you know, same-store sales was running at about 6.5% per year. Obviously in the last couple of years, it’s been more in that 3% to 4% range. And the trees don’t grow the sky. We were not going to get 6.5% forever, but we think that 3% to 4% is very sustainable over time. Because if I think about our business, we create a lot of value through pricing and through productivity. Going forward, we’ve still got to have the above inflation pricing, which we’re very confident of. We have to have the productivity, which we’re very confident of, and we need to add that third element, which is growth. And if you look over the last four years, we’ve grown in merchandise and intermodal $2.7 billion, and it’s been somewhat masked that we’ve been able to grow this because of that dramatic decline in coal. But as that coal stabilizes, I think those will be the three value creators, growth in intermodal and merchandise, continued productivity, and pricing above inflation.

And I appreciate that. I’m not looking to minimize what you guys have done in the past, or with the other pieces of the business. I guess what I’m trying to get at is that 3% to 4% in the last couple of years, that’s a 3% to 4% net of coal. If you look at it with coal in, it’s significantly lower than that. So is there a way to talk about 3% to 4%, if that’s kind of the inflation hurdle all in, even without coal changing?

I understand what you’re asking. So if I look at the coal business, obviously it’s been in a pretty dramatic transformation here, and we’ve been adapting to that. And obviously the pricing has been a little weaker, especially on the export side. But as the coal stabilizes, the coal based utility plants that are there are going to be required to keep the lights on, and I think our normal pricing within coal will resume as we go forward. The export market is always going to be more volatile. We think it’s volatile at a higher tonnage level, but clearly that’s the part that’s going to be the most variable. So we’re going to be up some in up times and down some in down times in the export, but the domestic, once we get this reset, we’ll have what I call normal pricing power.

And just a quick housekeeping question, Clarence, how much of the domestic utility book is up for negotiation this year? And how much do you think you’ll be on fixed variable by the end of ’14?

There’s about 25% of our utility contracts that are up for renewal this year. It’s a little difficult for me to speculate right now. We’ve got a couple of utilities that are looking at going to the fixed variable that are not yet quite sold on the concept.

And those renewals are at the end of the year, right?

That’s right.

Our next question comes from Mr. Thomas Kim with Goldman Sachs.

Just with regard to expectations for crew starts and active locomotives, can you give us a range or some guidance around those?

I think in the general same sort of trend that we’ve had. Our crew starts will be less than our volume in TTMs, and that consistent pattern I think will continue. So no real change.

And then just going back to some of the questions with regard to the crude by rail. Are you currently having discussions with shippers about tank car replacements, and what’s their response been so far?

We have been having discussions with shippers about some of the proposed regulations at the various agencies that the Department of Transportation has, but sort of along the lines Michael and Oscar addressed earlier, it’s much too early to speculate on what those regulations are going to be. So the shippers are in about the same mode the rest of us are, and that’s to take a sit and be cautious, and let’s see what the final outcome is.

There are active dialogs going on with the customers, with the various agencies within the DoT, and you know, it will take some time to work these things through. But there is active dialog to make sure we continue to build on the great safety record we have in moving these products.

Our next question comes from Mr. Tom Wadewitz with JPMorgan.

Fredrik, what’s the base you’re looking at for - I guess there a bunch of moving parts - but what’s the 2013 base you’re looking at for the earnings growth the next couple of years?

It’s $1.83.

Okay, so you’ve got $1.83, and if I understand your comments, you seem to imply that it would be difficult to get to the low end, so the 10% CAGR over two years, given a little higher base and the coal headwind. Is that correct?

It’s consistent with what we’ve said now for I guess over a quarter, which is we’re going to make some progress here in 2014 towards the long term guidance that we have in place. It’s clearly going to be more back end loaded than we had originally estimated, and we’re going to need some help from coal in 2015 in order to be able to get there. That’s our best view at this point.

And I think you’re saying one of the big things that’s different is we’re a little more negative on coal and coal’s more of a headwind in 2014. When I look at that compared to Clarence’s comments on utility, he sounds actually reasonably, I don’t know if constructive is an overstatement, but it doesn’t sound like utility is a big headwind this year. So can you give me a little more color on how large the export headwind is that you’re assuming, that kind of prevents you from getting to that 10% growth CAGR? And I don’t know if you want to say, well, thermal tons are down a lot, and net tons are stable. Any kind of further perspective on how big that export headwind and what’s within that would be helpful.

With the guidance that Clarence provided in his prepared remarks, that we think in the mid-30s range is what export coal is going to be for 2014, and we ended up 2013 with about 44 million tons, you have a pretty significant impact just on the volume alone. Then on top of that, you’re going to be cycling the price adjustments that we did throughout 2013, and especially in the third quarter. So between the volume impact and the price decrease that we did last year, you have a pretty significant headwind. And then as Clarence said, while we think volume for the year on the domestic side will be flat, we do expect our revenue per unit on the domestic side to be down in that low single digit number. So there will be significant headwind in our coal business for 2014. Now, the good news is that, you know, if you ask me about our coal business today versus two months ago, because of what we’re seeing on the weather side here over the last few weeks, we feel a little bit better about where things can end up. But right now, the best visibility is we’re going to need some help in 2015 to get to that low end of that guidance. We’re going to need some help on the coal side.

Just one further piece within that, Clarence, is that move from 44 down to mid-30s, is that a sharp decline in the thermal tons? Or is that a decline in tonnage in both thermal and met?

Most of the decline is in the thermal. Some met, but most of it’s in the thermal.

Our next question comes from Mr. Matt Troy with Susquehanna.

I’ve got two questions for Clarence. You indicated earlier, and it’s consistent with your message previously, that you would adjust pricing on export coal to keep U.S. coal competitive in international markets, to a point. I’m just curious, are we at that point, i.e. sequentially should rates per ton stabilize at this level and potentially go up with recovery in international coal? Or can we expect further downside if things remain weak in terms of per ton rates?

From our standpoint, we’re at the bottom for our rate structure on export coal. And as the market adjusts upward, you can expect to see us move upward with it.

And the second question would be simply, on the domestic piece, you talk about a more positive outlook. We can all certainly see the end market fundamentals that set the bed for that, but just want to hear from you guys a reaffirmation or a confirmation that you’re not using price or your competition, you’re not seeing change in behavior there to move coal in the international markets. You’ve said in the past yes, you’ll facilitate international moves with price. Just want to make sure domestically that you’re not using price as a way to stoke volumes.

We are not.

Our next question comes from Mr. Jeff Kauffman of Buckingham Research.

Fredrik, have you had a chance to take a look at how the pension assumptions changed with the interest rates and the market returns? And give us an idea what pension expense looks like 2014 versus 2013.

I think we’re going to see some help in our pension expense in 2014 versus 2013. It’s been a headwind for the last couple of years as we amortized the loss of what we saw in 2008 and 2009. But I think as we get into 2014, it will be a modest help to us. So that’s good news.

Could you quantify that at all, or give us an idea how much?

It will be somewhere around $20 million plus, but nothing significant.

Our next question comes from Mr. Scott Group with Wolfe Research.

I’ve got one for Clarence on coal and one on intermodal. On the export thermal side, I think there’s been some concern about some contracts that you signed a year or two years ago on a higher API2. And as that rolls over, the volumes would see some pressure. At this point, and based on your guidance for the 35 million tons, are we fully now cycled through that old API2 price structure where at least going forward in 2015 we shouldn’t have additional headwinds for that, and we can think about potential growth in export coal?

Yes, we are fully cycled through that.

And then on the intermodal side, it’s been a couple of quarters now, some really nice growth. Want to get your perspective, Clarence, on what do you think is finally clicking in the network that’s allowing it. And then maybe just what’s your pricing strategy there, because the volumes are really good, but the yields were a little bit under pressure? And how should we think about intermodal pricing?

First, on our intermodal pricing, as you’re aware, we’re having price strictly to what the truck market is, and there’s big competition there. And as I mentioned in the prepared remarks, we did get price, but it was offset by the decline in the fuel surcharge during that period of time. In fact, our pricing was very solid in our intermodal this year. I guess the second part of your question was what do we expect in terms of growth, and can we continue and sustain it? And my answer is yes. That’s evident by the fact that, number one, we’re expanding our northwest Ohio intermodal hub just a few years after it was opened. Number two, we’re opening up and completing this year a new terminal in Montreal, which is a 7 million person market that we haven’t effectively penetrated. In April of this year we’ll open up our new Winterhaven intermodal facility in south Florida. We’ve made an announcement for an expansion, a new intermodal terminal in Pittsburgh. We just doubled the size of our Louisville intermodal terminal, after only having been open two years. So we have positive views about our intermodal business. And finally, last year we started up a program that we called our Beneficial Owners program. We had a commercial name for it called Highway to Rail Conversions, H2R. And it has been highly successful this year in growing our business. And I just met with that group last week, and I think they’re going to be very successful in being able to address that 9 million truckload opportunity that Michael has referred to in the near future.

Our next question comes from Mr. Jason Seidl with Cowen & Company. Jason Seidl - Cowen & Company : Clarence, sticking on the intermodal side, we’ve been hearing that the truckload market is tightening up a bit. As it tightens, how should we think about the progression for your ability to start ticking up some of the rates in the intermodal sector? In other words, what’s the lag effect on your ability to take pricing up in the intermodal sector?

As you see those truckload rates firm up more and more, you’ll see our rates start to follow them. Lag time will be not as long as you think, actually, because a lot of the business is going to be on a transactional basis. Jason Seidl - Cowen & Company : And what percent is on transactional?

You know, I don’t have a number off the top of my head, because we have three different ways that we address those domestic markets. Jason Seidl - Cowen & Company : Well, you guys can get back to me offline on that. I guess the next question, on the crude to rail side, obviously there’s some changes coming on the car side, which does impact you guys a little bit. And there may be some increased safety regulations for you. I was just curious, on the insurance side have you guys seen any increased cost on the insurance side for you, or have insurance companies sort of changed the way they deal with you on not only crude but any of the hazmats that you might haul?

So far, no, we’re going to go into a normal renewal cycle and we try to, as we always do, educate our partners on the insurance side about the excellent safety record that we have, and all the initiatives we have to make it even safer. So nothing at this point.

Our next question comes from Mr. Ben Hartford with Baird.

I had a question on the crude by rail. It’s more along the lines of the business growth side. Looking to next year, I believe you were looking to add potentially daily train starts. Is there any sort of quantifiable amount of new business in terms of new facilities at refiners that are opening up?

Well, we moved, as you probably know, about 46,000 loads of crude in 2013, primarily to the eastern U.S. refineries. And we’ve told you on some of the previous calls we’re averaging between one and two trains a day. And the second train a day tended to be more in the fourth quarter and throughout the year. So in 2014 we expect to increase that crude. So you can use a number of about 50%, and we will move to two trains a day on a continuous basis over time. And then we’ll start to position ourselves as more and more of the unloading points along the East Coast are developed.

And then maybe as a follow up, you had mentioned that inflation was projected at like 1.5%. What would that number look like in terms of dollars relative to the $120 million you guys had in 2013?

Well, it’s not a direct correlation. It is an estimate of what the industry is incurring, as to what that [unintelligible] is supposed to be. So we had about $120 million of inflation at CSX in 2013, and I would say we’re probably going to see a similar amount in 2014. We’ll continue to benefit from both lower than normal health and welfare costs, because of some of the cost sharing arrangements we have, and also the demographic changes. And we’re also seeing some relatively muted materials inflation at this point. So I would say that inflation assumptions for 2014 should be pretty similar to what we saw in 2013.

Our next question comes from Ms. Cherilyn Radbourne with TD Securities.

I wanted to ask a question on the domestic utility coal business. We’ve talked many times on these calls about how cheap natural gas prices have in effect pulled forward some of the demand destruction that you were expecting due to regulation by 2015. I wonder if it’s possible for you to comment on how your coal shipments to those plants that you expect to close by 2015 compare to your coal shipments to all other plants in 2013.

The plants that we and our customers have identified as closing in 2015, those shipments have been curtailed, in most cases fairly dramatically, although one of those plants in particular, and I unfortunately can’t release the name of it, has actually taken some inbound coal during the last 30 days, because of this weather related activity that’s been going on. But we haven’t seen anything in regard to the other plants materially, as your question would imply.

So you’re saying most of the decline we’re going to see from these plants shutting down because of the environmental regs and gas prices has occurred.

Yes, so I guess another way of asking it would be just to say, where do those volumes look like relative to 2008? I mean, are they almost down by 100%?

I think versus domestic coal at the utility companies versus 2008 we’ll be down 45%, roughly.

And if we think about the plants that are about to close, between now and kind of 2016/2017/2018, our best estimate that we’ve shared publicly before is that there’s about 7 million tons or so that is left to come out over the next five years. And it’s not that it’s going to come out all in 2015. It’s going to be spread out between ’15 and ’16 and ’17. And so that’s a little less than 10%, about 10%, of our overall utility portfolio, what they still expect to see. So it is down significantly, and there’s a relatively small portion left to come out, that 10%, which can easily be overshadowed by some sort of just normal demand recovery and getting through this inventory overhang we have seen over the last few years.

And the last part is, and we just saw this in the weather related part, those plants that are not scheduled to be closed, that have already been scrubbed, are actually run harder and for longer periods of time. So the total burn of coal is virtually neutral.

Our next question comes from Mr. David Vernon of Bernstein.

Fredrik, in your closing comments about coal, you mentioned the revenue headwind. Is there a good percentage number rather than getting in the nitty gritty on export [unintelligible] or whatever, a good percentage revenue decline that we should be expecting in the coal business in ’14?

I think I gave you the components, similar to what we’ve done in the past. And we always separate out domestic versus export, because it’s just hard to predict the export business. The domestic side, we said flat volume. We have said on the export side, coming from 44 million tons down to about 35 million tons, continue cycling the impact of the price reductions we took in 2013. And so overall, we think that the RPU in 2014 for our coal business as a whole will be down in that low single digit area.

And then maybe just as a follow up, I think Clarence, as you guys look at growing the intermodal business, one of the things that you guys have been doing, at least from what I’ve heard in the industry, is offering a number of new services out of the northwest Ohio terminal. Is there a way that you can frame that in terms of the number of new service offerings that you guys have brought to market, and then how many more lanes or blank squares in the service grid there are for you to continue to expand the product?

I don’t know the exact number, but it’s a double digit number of OD pairs that we’ve created out of northwest Ohio. We’ve also added services out of Atlanta into the northeast. So it’s a significant number.

Our next question comes from Mr. John Larkin with Stifel Nicolaus.

I had a question, Clarence. I was wondering if you could clarify a little bit this push to convert the utility coal contracts over to the fixed and variable cost model. How does that benefit the utility, and how does that benefit CSX? It seems like that fixed component is really much like the guaranteed minimum that would trigger the liquidated damages.

It is. That’s exactly what it is on the fixed component. In effect, it eliminates liquidated damages. But one of the other advantages that it has to the utilities is that the price of the coal itself, on the variable part, goes into the equation for the dispatch cycle of which type of generation will be dispatched.

So this is, in theory, a win-win proposition for both the utility and for CSX?

I think so, yes.

And then just wanted to ask maybe a question of Oscar if he’s still on the line, related to the very impressive annual productivity target that seems to be down a little bit in ’14 relative to what was actually accomplished in ’13. But is this the type of target that is going to be available in ’15, ’16, and ’17? Or is the law of diminishing returns going to come into play here at some point?

You know, that’s a constant question we’ve asked ourselves for a while. And I think one of the reasons we exhibited the chart that we did is that there is a good staying power and a history to it. We have a very great cross-functional team that’s focused on those outer years, and every time they get together and they come up with ideas for the near term as well as the long term, it appears to be a very positive outlook. So without giving too much guidance, I think for the very near future, over the next few years, I think we’ll continue at that rate.

Our next question comes from Mr. Walter Spracklin with RBC Capital Markets.

My question is going to come back to the guidance run rate. You mentioned that you needed some help from coal. When I look at your base assumption, when you provided the 10-15% earnings growth guidance, you had indicated that your base assumption would be for flat coal. When I look at what’s evolved in ’13 and now into ’14, we’re seeing that volume is down in ’13 on the thermal side, flat in ’14. Yield is down in both years, and export volume now trending down 20% for this year, with yields down as well. Tell me if this is a little simplistic, but when I plug in what I need to get in ’15 just to make it go back to your flat revenue assumption, it’s not a little bit of help from coal, it’s quite a bit of help from coal. Am I looking at it a little bit too simplistically? And if not, how realistic should we be looking at that 10-15% guidance, even as a realistically achievable number up to 2015?

I think what we said is that we’re going to need some help from coal. I think there’s a lot of other things that are going on in our business, as Clarence outlined earlier, that is very positive right now. If you look at his outlook table, a significant portion, the vast majority of our businesses, are doing very well. And we frankly have probably picked up a little bit more than we would have thought from that perspective. We continue to do very well on the productivity side. But clearly, we’re going to need some help. But I don’t think we necessarily need to get back all the way where we were in the first quarter of last year, when we issued the guidance. Because the rest of the business continues to be very vibrant and we continue to drive great productivity savings through Oscar’s teams. But we will need some help.

So what I understand is that your other businesses are helping out, which is fantastic, obviously. It gives me a little bit of concern, though, that there’s a couple of comments made where you indicated that the revenue growth from the improvement in those businesses didn’t go to the bottom line to the extent that you would expect it. I think it was mentioned a couple of times to the extent that you expected it. I’m just curious as to whether there were factors that did not allow it to go to the bottom line in Q4 that might have an impact on your longer term guidance to the extent that those factors play out over the next year or two. Using 2013 as your base, a little bit better than expected, I don’t know if you would have had a good indication of your base at that point when you gave your guidance, and maybe that was where it was, but is there anything that didn’t need you to get to your expected flow through that might impact your guidance for the 10-15% up to 2015?

Throughout the fourth quarter, including the third quarter earnings call, we issued essentially pretty clear guidance, I thought, about the fourth quarter was going to be a pretty challenging quarter, because we knew we were going to cycle both the incentive comp issue and the real estate. And you couple that with the casualty, another $16 million, you had $75 million of things that we don’t expect long term to have to deal with. If you adjust $137 million of revenue growth and take out that $75 million, you’ll see that our incremental margins for the quarter were right around 55% or something like that. And we know that we will have this headwind on the real estate side throughout the first half of next year, but once we get through that, we are pretty confident that we’re going to get back to a more normal place where we’ve been in the past, and where we would have been this quarter if it wasn’t for this headwind.

Our next question comes from Mr. Justin Long with Stephens.

You gave your best guess for export coal volumes this year to be around 35 million tons. I was wondering if you could talk about how much of that business is under contract for this year versus what you expect to get in the spot market.

Absolutely. Nearly three-quarters of the business is contracted for the year.

The other one I had, on the equipment purchase front, I was wondering if you could comment on what car types are factored into your 2014 capital budget. And also, specifically on coal, if you could comment on where you stand in terms of replacing that fleet?

We are doing a lot of rebuilds in 2014, especially on a portion of our coal fleet. That is a big driver. We’re also purchasing some jumbo hoppers and some auto racks as well. And in terms of our coal fleet, I think you might know this, but on the utility side, over 90% of our fleet is really owned by the utilities and not CSX. And that has obviously been a great impact and helped us significantly, the fact that that market has declined, we haven’t sat on a significant portion of excess capacity. So it’s going to be between rebuilds on the coal cars, it’s going to be automotive racks, and then also jumbo covered hoppers that we’re going to spend most of the capital in 2014.

Our final question comes from Mr. Keith Schoonmaker with Morningstar.

Oscar, within your targeted efficiency gains, do you expect the main leverage to be the same as in 2013, mainly fuel, TTM per crew start, and locomotive efficiency? And do these basically distill down to just building longer trains? Or is that too simplistic?

As you can imagine, it is a very complicated business sometimes, but it boils down to those basic same factors. And there’s a lot of technology involved, and a lot of process change, and of course a lot of great and hard work by people. But yeah, pretty much in the same lines.

And one other quick one. I believe it was Clarence who mentioned a mix richer in northern region coal, which shortened the average length of haul. But could you share the domestic coal mix of Illinois and PRB during the quarter, and perhaps your expectations for how this will influence length of haul, maybe in the next couple of years?

The combination of our Illinois Basin and PRB for this quarter was 49%. And a positive impact is that the more of the Illinois Basin that replaces the Central App, particularly into the Florida regions and the longer haul regions, is actually we view as a positive, because it’s a much longer length of haul and the revenue is higher on it.

Illinois Basin now is about 30%, which is similar to our Central App tons of freight. So it’s equal to Central App right now, and growing.

Is the length in PRB shorter than that?

It tends to be, because it comes across the Chicago Interchange, and mostly penetrates into our system as far east as New York.

Well, thank you everyone for your interest and attendance, and we’ll see you next quarter.